- Martin Sommer, Allan Auclair, Armand Fouejieu, Inutu Lukonga, Saad Quayyum, Amir Sadeghi, Gazi Shbaikat, Andrew Tiffin, and Bruno Versailles
- Published Date:
- June 2016
|Algeria||A public sector hiring freeze instituted in 2015 and still in place. The 2016 budget laws call for a 9 percent cut in spending (mainly capital expenditures), while a subsidy reform was initiated by raising prices on fuel, electricity, and natural gas.|
|Bahrain||In 2015, fees and charges for government services increased, while a meat subsidy was cancelled. Natural gas prices are being gradually increased over 2015–21. In 2016, the price of diesel, kerosene, and gasoline products (January); tobacco and alcohol taxes; and electricity and water tariffs (March) all increased. Current expenditure streamlined.|
|Kuwait||Fuel subsidy reform in 2015: diesel and kerosene prices were increased (saving 0.3 percent of GDP), while non-essential current spending was curtailed. In March 2016, the cabinet announced a wide-ranging set of economic and financial reforms. In addition to initiatives aimed at enhancing the role of the private sector through financial, labor market, and other reforms that will help reshape the government’s role, reforms include the following fiscal measures: (1) introduction of value added and corporate profit taxes, (2) re-pricing of some commodities and public services, (3) reforms of the civil service (including wages), and (4) privatization of state-owned assets and a greater role for public private partnerships.|
|Oman||Measures announced in January 2016: (1) increase in fuel prices, (2) reduction in defense spending, (3) reduction in capital spending (related to development projects and hydrocarbon production), (4) increase in corporate income tax, (5) higher fees for government services, and (6) reduction in government workers’ allowances, other remunerations and operating expenses (including transportation allowances, business travel, hospitality spending).|
|Qatar||The 2016 budget suggests government spending will continue being restrained this year. Authorities have recently increased some utility and energy prices (water and electricity charges in September 2015, and gasoline prices in January 2016).|
|Saudi Arabia||In 2015, authorities increased transfers of investment income from the Public Investment Fund and the Human Resource Development Fund. In addition, they introduced spending controls for both current and capital spending, and the announced fiscal packages were under-executed (saving 0.5 percent of GDP). In 2016, the government raised prices of energy products (saving about 1¼ percent of GDP), while planning to further curtail spending.|
|UAE||Tariffs for water and electricity were raised in January 2015, saving ½ percent of GDP. Policymakers have also cut grants and transfers to government-related enterprises.|
|Azerbaijan||In 2016, authorities have increased mineral royalty tax rates, raised the threshold on the simplified tax, upgraded checks on tax evasion and increased administrative measures (expected savings are 0.5 percent of GDP). The authorities have significantly cut public infrastructure spending, while increasing transfers to vulnerable populations to partially compensate for the adverse impact of devaluation on real incomes.|
|Kazakhstan||In 2014, authorities embarked on a three–to–five–year stimulus plan to modernize critical infrastructure and promote lending to small and medium-sized enterprises, $12 billion (5¾ percent of GDP) of which is financed through buffers and $7 billion (3 percent of GDP) in international development bank loans. No new measures have recently been announced.|
|Turkmenistan||Authorities have raised import duties, placed limits on car and food imports, and cut investment spending (by over 20 percent in 2015) and utility subsidies—more capital spending cuts are envisaged in 2016. Public salaries have been increased, while social spending was reduced.|
|Uzbekistan||The authorities recently announced a new public investment program, amounting to $41 billion during 2015–19 (11 percent of GDP).|
|Options||Cost and Risk Characteristics||Benefits||Policy Issues|
|1. Drawdown of Own Resources|
|Sovereign wealth funds||• If large deficits persist, buffers could diminish, investor sentiment could shift, and borrowing costs could increase.|
• Losses could be incurred if assets are liquidated in unfavorable market conditions.
|• Could ease pressures on domestic liquidity.|
• Funds are readily available, contingent on market conditions.
|• Need a decision-making structure to determine how much, when, and what assets to sell.|
• Fiscal rules governing sovereign wealth funds.
|Bank deposits||• Could tighten liquidity in the banking system and exert pressures on interest rates.|
• Contingent on the surplus liquidity in the banking system, the government could crowd out the private sector.
• Net costs could be very high if government deposits are small in relation to financing need.
|• Financing costs for the government are low, particularly since the deposits likely yield low interest.|
• Funding is readily available because it is not constrained by investor appetite for risky assets.
|• Coherence in monetary and fiscal operations is needed to minimize liquidity shocks.|
|2. External Borrowing|
|Issuance of sovereign bonds||• Cost of borrowing can be high if market sentiment shifts due to uncertainties about the trajectory of oil prices and if the sovereigns are downgraded.|
• Access is contingent on market sentiment and liquidity conditions in the global market.
• Increases currency exposure and exchange rate vulnerability for countries with flexible exchange rates.
• Large financing needs could lead to re-emergence of debt vulnerabilities.
|• Eases pressure on domestic liquidity conditions.|
• Debt is marketable and can be traded in a secondary market so investor appetite might be higher than for domestic bonds.
• Can attract investors seeking to diversify their portfolios, given that the countries have not been in the markets regularly.
• Pre-financing when market conditions are favorable could reduce borrowing costs.
|• Need to develop debt management strategy.|
• Need legal and financial advisory services necessary to achieve a successful issuance.
• Need to monitor issuance by sovereigns with similar credit ratings and establish effective investor-relations programs.
|Sovereign bond issuance for on-lending to government-related entities||• Central government assumes the counterparty risks of government-related entities.||• Could reduce borrowing costs for the government-related entities.||• Legal framework is needed to govern the transaction.|
|Sukuk||• Usage for budgetary purposes could be constrained or would require complex structuring.|
• Issuance costs could be higher than for conventional bonds.
|• Investor demand could be high because it offers diversification opportunities.||• Legal framework to issue Sukuk is needed, as is identification of permissible assets.|
|Commercial bank loans, including syndicated loans||• Market for loans not as developed as that of international bonds.||• Eases pressure on domestic liquidity conditions.|
• Greater flexibility to influence terms depending on negotiating power.
|Bilateral loans, including project loans||• Project loans tied to specific project use, thus less fungible.|
• Disbursement highly dependent on progress of project.
|• Could finance public investment programs.||• Institutional framework for monitoring projects is needed.|
|3. Domestic Borrowing|
|Treasury bills||• Exposes government to rollover risks given the short duration.||• Instruments are denominated in domestic currency, so there is no currency risk.|
• Could attract capital inflows from foreign investors wishing to participate.
• Provides banks with short-term liquid assets and facilitates their liquidity management.
|• Ensure infrastructure for issuance and calendar.|
|Treasury bonds||• If domestic liquidity conditions tighten, the domestic cost of borrowing could be higher than in international capital markets.|
• In tight liquidity conditions, could crowd out private sector.
• Islamic banks, which account for a significant market share of banking systems in the GCC, cannot participate.
|• Medium- to long-term instruments issued in domestic currency, so reduces rollover and currency risk.|
• Can facilitate domestic debt market development and provides a reference benchmark for private sector issuance.
• Provides alternative investment opportunities for financial institutions, and for banks the zero-risk weight can improve the capital-adequacy ratio.
• Could attract capital inflows from foreign investors wishing to participate.
|• Ensure infrastructure for issuance and calendar.|
• Develop medium-term debt management strategy.
|Sukuk||• Could require complex structuring if it is to be used for budgetary purposes since an underlying asset is required.||• Provides investment opportunities for Islamic banks and facilitates liquidity management in the Islamic banking segment.||• Need a legal framework to issue Sukuk and to identify permissible assets.|
|Retail instruments||• Administrative or market rates.|
• Could crowd out banks in the funding market.
• More costly distribution arrangements.
|• Could tap into high-net-worth clients.|
• Widens investor base for the government.
|• Need an institutional framework for issuance.|
|Commercial bank loans, including syndicated loans||• Could crowd out the private sector.|
• The secondary market for loans is not as developed as that for bonds.
|• Government could negotiate good terms.|
|GCC and Algeria||CCA Oil Exporters|
|Financial Sector Policies|
|Policies to ease liquidity pressures in banks|
|Traditional measures 1/||√||√||√||√||√||√|
|Unconventional measures 2/||√||√|
|Policies to maintain solvency of the banking system|
|Recapitalization of banks 3/||√||√|
|Purchase of NPLs||√||√|
|Termination of licenses||√|
|Strengthening prudential measures and frameworks|
|FX Open position||√|
|Capital requirements 4/||√|
|Provisioning on restructured loans||√|
|Macro Policies with Direct Impact on Banking System Liquidity or Asset Quality|
|Exchange rate policies|
|Intervention to stem depreciation||√||√||√||√|
|Devaluation and/or allowing depreciations||√||√||√||√||√|
|Administrative controls on FX transactions||√||√||√||√|
|Interest rate policy|
|Increases in interest rates 6/||√||√||√||√||√||√|
|Declines in interest rates||√||√|
|Fiscal (Deficit Financing Options)|
|Drawdown of SWF or other external assets||√||√||√||√||√||√|
|Drawdown of local bank deposits||√||√|
|Arrears to domestic government suppliers||√|
Traditional measures include reducing reserve requirements (Azerbaijan), increasing loan to deposit ratio (Saudi Arabia), reducing the amount and frequency of T-bill auctions (Qatar), engaging in currency swaps (Kazakhstan), and raising deposit insurance (Azerbaijan). Algeria announced reactivation of refinancing facilities, but continued its liquidy absorption operations during 2014–15.
Unconventional measures refers to the placement of deposits at commercial banks including by sovereign wealth funds (Azerbaijan), pension funds (Kazakhstan), and directed lending through commercial banks (Turkmenistan).
This included use of public funds for recapitalization (Algeria) and consolidation of banks (Azerbaijan).
Forbearance on capital has included reducing capital requirements and allowing banks to operate below statutory capital requirements (Azerbaijan).
The authorities requested local banks to stop selling option contracts on foreign exchange forwards.
In the GCC countries that increased interest rates, these policy changes followed an interest rate hike by the U.S. Federal Reserve.
2014. “Is It Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment”. In World Economic Outlook, Chapter 3. Washington: International Monetary Fund, October..
2014. “Making the Most of Public Investment in MENA and CCA Oil-Exporting Countries”. Staff Discussion Note 14/10, International Monetary Fund, Washington..
2015. Tax Policy Reforms in the GCC Countries: Now and How?Washington: International Monetary Fund..
2016. “Macroeconomic Stability in Resource-Rich Countries: The Role of Fiscal Policy”, Working Paper 16/36, International Monetary Fund, Washington..
2016b. “The Fiscal Costs of Contingent Liabilities: A New Dataset” Working Paper 16/14, International Monetary Fund, Washington..
2014. “Economic Diversification in the GCC: Past, Present, and Future” Staff Discussion Note 14/12, International Monetary Fund, Washington..
2015. Oil Prices, Financial Stability, and the Use of Countercyclical Macroprudential Policies in the GCC.Washington: International Monetary Fund..
2016. Breaking the Oil Spell: The Gulf Falcons’ Path to Diversification.Washington: International Monetary Fund.editors.
2016. Economic Diversification in Oil-Exporting Arab Countries.Washington: International Monetary Fund..
2000. “Fiscal and Macroeconomic Impact of Privatization.” Occasional Paper 194, International Monetary Fund, Washington..
2015. How the Oil Price Decline Might Affect Remittances from GCC.Washington: International Monetary Fund..
2014. “How Much is A Lot? Historical Evidence on the Size of Fiscal Adjustments”. Working Paper 14/179, International Monetary Fund, Washington..
2015. “Global Implications of Lower Oil Prices” Staff Discussion Note 15/15, International Monetary Fund, Washington..
International Monetary Fund. 2014. Regional Economic Outlook, Middle East and Central Asia.Washington, October.
International Monetary Fund. 2015a. “Structural Reforms and Macroeconomic Performance: Initial Considerations for the Fund.” Staff Report, Washington.
International Monetary Fund. 2015b. Regional Economic Outlook, Middle East and Central Asia.Washington, October.
2016. “Commodity Price Shocks and Financial Sector Fragility” IMF Working Paper, (Washington, D.C.: International Monetary Fund)..
2016. “Avoiding the New Mediocre: Raising Long-Term Growth in the Middle East and Central Asia.” Departmental Paper, International Monetary Fund, Washington..
2001. “From State to Market: A Survey of Empirical Studies on Privatization.” Journal of Economic Literature39 (6): 321–89..
2015. Energy Price Reforms in the GCC: What Can Be Learned from International Experiences?Washington: International Monetary Fund..
2016. “Investment and Growth in the Arab World.” A Scoping Note, International Monetary Fund, Washington..
2014. “Public Investment as an Engine of Growth.” Working Paper 14/148, International Monetary Fund, Washington.
The value of oil and natural gas exports is projected to fall by almost $450 billion in the GCC countries and Algeria in 2016 compared with 2014; the corresponding estimate for the CCA oil exporters is $65 billion. In contrast, the MENA and CCA oil importers are collectively projected to save only $20 billion on oil and gas imports this year compared with 2014.
Some countries pursue extensive off-budget quasi-fiscal operations by state-owned enterprises, which could further increase the estimates of current fiscal deficits. However, these transactions are difficult to quantify, given data gaps on activities of the state-owned enterprise sector.
The October 2015 editions of the Fiscal Monitor (IMF 2015c) and Middle East and Central Asia Regional Outlook (IMF 2015b) discuss how medium-term fiscal frameworks can support consolidation efforts over time. The main recommendations include formulation of clear medium-term fiscal objectives to anchor decisions related to annual budgets, identification of accompanying policy measures including contingency plans, and a strong communication strategy to secure buy-in for the planned policies. Among MENA and CCA oil exporters, preparations are underway to establish or enhance medium-term frameworks in, for example, Algeria, Bahrain, Kazakhstan, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Increasing fiscal transparency and moving off-budget entities onto the budget would also be highly desirable. Bova, Medas, and Poghosyan (2016) discuss the role of institutional quality in reducing pro-cyclicality of fiscal policy in resource-rich countries.
See Albino-War and others (2014) for policies to improve efficiency of public investment in MENA and CCA countries. Roudet and others (2016) discuss the relationship between investment and growth. Alreshan and others (2015) and Rodriguez, Pant, and Flores (2015) discuss options for raising budget revenues and energy reforms.
See Callen and others (2014) and Dauphin and others (2016) for a more detailed analysis of MENA countries. Cherif, Hasanov, and Zhu (2016) discuss how Indonesia, Malaysia, and Mexico fostered diversification. IMF (2015a) discusses macroeconomic performance following structural reforms and summarizes recent IMF work on macro-structural issues. The IMF organized a conference on diversification of oil-exporting countries in 2014 (the conference materials are available at http://www.imf.org/external/np/seminars/eng/2014/mcd/). Abiad and others (2014) suggest that public investment can play an important positive role in fostering development, provided such investments are well targeted and fiscally prudent. Warner (2014) cautions about the mixed tracked record of developing countries in boosting long-term growth through public investment booms.
These calculations assume that the relative share of domestic and expatriate workers follows historical trends.
See Mitra and others (2016) for further details.